In one of my previous articles: The Financial Crisis: What It Means for the Little Guy, I came to the conclusion that most of the sub-prime/credit crisis isn’t really affecting you or me. Now that the stock market has turned trillions of dollars of capital gains into paper money, let’s take another look.

The Market

If you have invested in anything, it’s likely taking a battering. Whether it’s individual stocks, mutual funds in retirement accounts, or pension funds, you’ve probably seen it dip.

At this point there are two choices: do you switch out your investments into more conservative assets? Or do you wait and ride it out?

How to answer that depends on your age. For those nearing retirement, the devastation of seeing 20 or 30 percent wiped out may induce ulcers. Bonds aren’t yielding much right now either (less than 4 percent, in some cases), so is that where you want to put your money? Some people may consider hoarding it and throwing it into a savings account. (The FDIC now insures up to $250,000).

But when are you retiring? Next year? Ten years? More?

Tax Planning

Regardless of your age, right now is a good time for some smart tax planning. If you had capital gains earlier this year, now is a good time to sell those losers. It can lower your tax bill and free up some money that would otherwise be stuck on some less-than-stellar performers. Losses on the 1040 are limited, so be sure to read the instructions before you sell everything under the sun. But a few thousand dollars usually can do the trick. (Losses can also be carried forward!)

So I’ve gotten rid of the bad ones, now what? Now ask yourself if you still want to shift your money around. When you’re looking at your allocation, do you still like the funds/stocks/bonds that you’re invested in? Do you believe it will come back? How has its historical performance been? Remember that the market is cyclical – though some would argue the cycle is getting shorter. That means that looking back through history, the market falls but eventually rises…only to fall again to again.

Retirement

Now back to retirement. People who have retirement decades down the road could consider shifting their assets…or if they have the money, could consider buying in. A safe bet is an index fund – when the market is low, there’s so much more upside to be had. Vanguard or Fidelity have numerous funds to choose from should that an option for you.

Or if you’re a really brave soul, you may decide to buy into individual equity again. Again, as with everything, there is a risk attached. So assess your risk tolerance before you decide where to invest.

But what if I’m retiring next year? The boomers have been dragged through some bad times these last few years from watching the dot-com boom to bust to financial institutions disappearing by the day. If you don’t have a financial planner, consider consulting one now. He or she will help you assess your expected income. That means, add up all the money you think you will be getting in retirement – social security, pension/annunity, IRA, personal savings, etc. It’s always better to err on the side of being conservative when calculating how much you’ll bring in and be generous to yourself when calculating how much you’ll spend. The say the average American needs 60 to 70 of their previous income levels. Retirees underestimate thinking they lack expenses like gas and entertaining, when in fact many want to travel and see the world, ringing up much higher expenses than expected.

After you’ve considered how much money you’ll bring in and how much you’ll need to survive (happily), ask yourself if it’s enough. Though many people would like to retire early, more and more boomers and pre-boomers are finding they must delay retirement or perhaps find a part-time job in their old age. If that sounds anathema to you but there’s still not enough money coming in, consider a change in lifestyle. If you own a home and happened to live in areas without a housing fall-out, would you consider moving to a cheaper place? If you have two cars, but really only need one, sell the other – it will save on gas, insurance, maintenance, etc. Small changes can make a big difference also such as cutting down your bills.

So the little guy (that’s you and me) must think about all the ways to ride through this wave. It’s not going to be easy. No matter how much you shift around your finances, part of it is still the waiting game. We have to wait for the economy to be better. It will seem interminably long, but you will get through!